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Monday, November 21, 2011

Surprising Developments in US-China Solar Panels Case Are Anything But

The New York Times reports today that the new US antidumping and countervailing duty investigations of Chinese solar panels is proceeding exactly as expected - by everyone other than the folks who petitioned for the case, of course:

Chinese solar panel manufacturers are preparing to shift steps in their production processes to South Korea, Taiwan and the United States in response to the filing of a trade case against them in Washington, and are working on a way to retaliate against U.S. exports to China, Chinese solar industry executives and officials said Monday.

Preparations to redesign supply chains and retaliate come after the U.S. Department of Commerce opened an anti-dumping and anti-subsidy case against Chinese solar panel manufacturers on Nov. 9, at the request of SolarWorld Industries America and six other U.S. solar companies. The Commerce Department said it was considering anti-dumping tariffs of 50 percent to 250 percent on Chinese solar panels, plus a request by SolarWorld for anti-subsidy tariffs of more than 100 percent.

After hastily hiring trade lawyers, Chinese solar panel manufacturers are increasingly gloomy about their chances of winning the case, said Ocean Yuan, the president of Grape Solar, a big importer of solar panels based in Eugene, Oregon. Many trade lawyers in Washington have reached the same conclusion because the Commerce Department handles anti-dumping complaints against China under special rules that heavily favor U.S. manufacturers. China accepted the rules as part of its joining the World Trade Organization in 2001.

Mr. Yuan said that Grape Solar was already in negotiations with several Chinese manufacturers, whom he declined to identify, to do final assembly of solar modules in Oregon as the last step in new supply chains that would start in China then run through South Korea and Taiwan to avoid the likely tariffs.

The Chinese solar panel industry is also seeking legal advice on filing its own anti-dumping and anti-subsidy trade case against the United States with China’s Commerce Ministry, Chinese solar industry executives in Beijing said Monday. The most likely target would be U.S. exports of polysilicon, the main material used to manufacture conventional solar panels, said Wang Shijiang, a manager at the China Photovoltaic Industry Alliance based in Beijing....

The United States exported $873 million worth of polysilicon to China last year while importing only $4 million worth of the material, according to GTM Research, a renewable energy consulting firm based in Boston....

An executive at a Chinese solar manufacturer said his company had already begun making elaborate preparations to move solar cell production out of China for panels destined for the U.S. market.

Chinese manufacturers have studied moving solar cell factories directly to the United States but have largely rejected it in favor of other countries because it takes so long to comply with the many American regulations for opening new factories that use a lot of chemicals, said the executive, who spoke on condition that neither he nor his employer be identified.

Frank Haugwitz, a solar industry consultant based in Beijing, said Taiwan had a very large solar cell manufacturing sector with capacity equal to more than five times the U.S. market, and a significant chunk of that capacity was not being used.

Solar cells fabricated in Taiwan or South Korea from Chinese wafers will be shipped to the United States for final assembly, Mr. Yuan of Grape Solar said.

Final assembly involves a lot of labor in bolting components together, for which regulatory approvals tend to be simpler than for solar cell manufacturing. The final assembly typically accounts for a little less than a fifth of the total cost of making a solar panel.

The U.S. trade case was filed against solar panels for which either of the final two steps — turning the wafer into a cell or assembling cells into a panel — was done in China. So if Chinese manufacturers shipped solar cells from Taiwan or South Korea back to China for final assembly into modules at their existing factories, these products would also be hit by any steep tariffs that the United States might impose.

Ben Santarris, a spokesman for SolarWorld Industries America, a subsidiary of SolarWorld of Germany, said that there was only one small Chinese-owned factory in the United States doing final assembly of modules. “Chinese manufacturers would have to build significant production capacity here for final assembly” to reduce appreciably their exposure to any tariffs, he said.

The single Chinese module assembly site, located near Phoenix, Arizona, and owned by Suntech Power, has a capacity equal to about 3 percent of the American market, according to GTM Research.

Companies based in China manufactured 41 percent of the panels installed in the United States in the third quarter of this year.

Mr. Santarris also said that solar cells manufactured in Taiwan or South Korea and imported by the United States would not be immune to trade cases — despite close U.S. trade relations with both countries — if they were discovered to have broken trade rules, as in benefiting from government subsidies.

So, to recap: the US investigation on solar panels is a little more than a week old, and it's already inciting trade diversion (i.e., a shift in production from China to places like Korea and Taiwan), Chinese retaliation against US exporters and (perhaps) a small amount of new, low-value assembly work in the United States. Since all of these efforts to avoid new US tariffs aren't free, US consumers will inevitably end up paying more - probably a lot more - for solar panels in the very near future. And it's highly unlikely that the economic gains from a few new jobs in US solar panel assembly will offset the economic (and environmental!) losses imposed on American families and businesses who will be forced to pay higher prices. And, of course, if any foreign producers figure out how to be cost-competitive and start shipping large quantities of low-priced solar panels to the United States, the domestic producers have threatened to file new trade cases against those imports, and domestic prices will go even higher. Sweet.

So those are the likely results of the new solar panels investigation, and it's pretty much what most of these cases produce. What the case is not going to produce, however, is a strong and vibrant domestic solar panel industry because, among other things, US regulations are too onerous for the domestic industry to be globally competitive. (And if you think this is merely because of lax labor and environmental standards, you'd probably be wrong: it's not like South Korea is a polluter's paradise with horrible labor conditions. And the United States does have one of the highest effective corporate tax rates in the industrialized world.) If we improved these regulations and lowered these taxes, then maybe the aggrieved US industries could compete and maybe, just maybe, some of these expensive and often counter-productive trade investigations wouldn't occur.